Investment (Risk Tolerance) 2

Question 1

An investor's risk tolerance is BEST described as which of the following?

Accepted Answer

The willingness and ability to endure declines in portfolio value

Answer

Risk tolerance combines an investor's psychological willingness and financial ability to withstand losses.

Question 2

Which factor generally INCREASES an investor's capacity to take on risk?

Accepted Answer

A longer investment time horizon

Answer

A longer time horizon allows more time to recover from market downturns, increasing risk capacity.

Question 3

A questionnaire that asks how an investor would react to a 20% portfolio drop is measuring which dimension of risk?

Accepted Answer

Risk willingness (attitude)

Answer

Reaction to losses measures psychological willingness, the attitudinal component of risk tolerance.

Question 4

An investor with LOW risk tolerance would most likely prefer which asset?

Accepted Answer

U.S. Treasury bonds

Answer

Treasury bonds offer stability and low volatility, suiting a low risk tolerance.

Question 5

Why is it important to distinguish between risk capacity and risk willingness?

Accepted Answer

An investor may be willing to take risk but unable to afford the consequences

Answer

Willingness and capacity can conflict, so both must be assessed to set an appropriate strategy.

Investment Practice Test